China is increasingly investing in North Africa. Shipping should take note.
The shipping industry is largely dependent on China for the new ships it needs to decarbonise. Having recently overtaken Greece as the world’s largest ship owner, China is also the world’s leading ship builder with around 45% of the global market in 2022, well ahead of Japan and South Korea, each with around 15%.
The Chinese shipbuilding industry is largely in state hands, with some established foreign invested yards doing good business and a few inactive yards recently restarting in response to increased demand for newbuildings. An enhanced state position on low carbon technology might lead to more research and development at Chinese shipyards. There could even be more emphasis on fleet renewal for Chinese flag operators. It is now nearly a year since China Merchants Energy Shipping and COSCO Shipping Bulk jointly announced that their two behemoth corporations would co-operate on methanol and other low carbon fuel programmes. The government’s renewed emphasis on green technology could be just the driver to push this cooperation forwards, especially if it comes backed by real money. But most investment in low-emission vessels being built in China comes from overseas customers.
China is the world’s biggest ship owner, the world’s biggest goods exporter, the world’s biggest oil, LNG, coal and iron ore importer and the world’s leading ship builder. Developments in China’s economy and in its environmental policies will have widespread and lasting repercussions for the global shipping industry. The Chinese government’s reaction in recent weeks to weak economic data demonstrates that evolving ‘green tech’ policies there will have direct and indirect consequences for shipping. Little is yet certain, but China’s increased focus on decarbonisation should make us all focus more on China in return. What is its plan for decarbonising trade and shipping?
As the EU introduces Shipping to its Emission Trading Scheme (ETS) and implements the Carbon Border Adjustment Mechanism (CBAM), China faces increasing costs for its exports. On 1 October 2023, the CBAM entered into application in its transitional phase, with the first reporting period for importers ending 31 January 2024. The CBAM will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. The EU says that the CBAM will eventually – when fully phased in – capture more than 50% of the emissions in ETS covered sectors. The objective of the transitional period is to serve as a pilot and learning period for all stakeholders (importers, producers and authorities) and to collect useful information on embedded emissions to refine the methodology for the definitive period.
China faces increased costs for shipping to one of its main markets as the environmental costs of globalised supply chains is - extremely belatedly - added to the low physical cost of operating those supply chains.
China may be addressing this issue of increased environmental costs in more ways than one might expect.
2023 is the tenth anniversary of China's Belt and Road Initative. Xi Jinping is said to have given it the BRI label first at a speech in Kazakhstan in 2013. The label was new but the concept had been in use for years. Chinese official sources often refer to “China’s Silk Road Economic Belt and the 21st Century Maritime Silk Road.” By 2022, more than 10,000 Chinese firms had invested over USD 2 Tn in Africa with current investment standing at over USD 300 Bn and annual China-Africa trade exceeding USD 200 Bn, (says the US Committee on Foreign Affairs).
53 African nations have joined the BRI in the last decade. The focus has been very much on logistics.
In Africa, China has built the first new railways since the British left. In 2016, China Civil Engineering Construction Co. Ltd completed the 186 km long Abuja-Kaduna section of the Lagos-Kano standard-gauge project, which it claims is the first standard gauge railway in West Africa. China has invested around USD 5 Bn in the 750 km long Addis Ababa-Djibouti high-speed electric train, which has cut city-to-city journey times from 36 to 12 hours. It terminates at Doraleh multipurpose port in Djibouti, constructed at a cost of USD 422 Mn by China State Construction Engineering Corp (CSCEC). The port opened in May 2017 as part of the USD 3.5 Bn, 4,800 hectare Djibouti International Free Trade Zone and the Djibouti International Industrial Parks Operation. The USD 4.7 Bn Nairobi-Mombasa railway connects the Kenyan hinterland to the sea, though with concerns about Kenya's financial debt to China.
Other BRI projects in Africa include new ports and port expansions in several countires. These include the Lekki Deep Sea Port Facility near Lagos in Nigeria, new ports in Djibouti and Nigeria, the Walvis Bay expansion the port of Bata, and the deepwater port at Malabo.
Now China may be using Africa as a springboard to the EU (and to the Americas), transferring manufacturing to North Africa to make its supply chains shorter and cheaper, and coincidentally environmentally friendlier. Currently the focus is on Morocco, now the third most attractive country in Africa behind Egypt and South Africa for Chinese investment. China has offered to build a high speed train line between Casablanca and Agadir.
Dozens of Chinese companies have announced their intention to set up automotive, aerospace, textile, electronics, and machinery factories at the 2,000 hectare Mohammed VI Tangier Science and Technology City, a joint venture between Morocco and China, launched in 2017. Morocco's proximity to and free trade with the EU, its free trade agreement with the US and its abundant renewable energy resources and relatively low cost land have led to billions of dollars of investment from Chinese auto and battery makers in particular. Shipping cars from Morocco to the EU rather than from China significantly alters global supply chains - especially if the parts and batteries used in the cars are also made in Morocco rather than in China.
Moreover there are financial benefits to operating in Morocco, where labour costs are only 25% of those in southern EU nations. In Morocco, two industrial zones, Tangier and Kenitra, have been granted free zone status – a total exemption from corporate tax for companies operating in these zones for five years, followed by a cap of 8.75 per cent for the next 20 years. It makes the African nation an attractive option, given that transit time from Morocco to Spain is just a day while labour costs are around a quarter of those in Spain and slightly lower than in eastern Europe.
Morocco, Algeria, Tunisia, Libya and Egypt share geographic, demographic and economic advantages - perhaps Chinese investment could be the catalyst for development.
The China-Egypt Suez Economic and Trade Co-operation Zone, located in the Ain Sokhna district of Suez province east of Cairo, has become a landmark project for China and Egypt’s co-operation under the Belt and Road Initiative. Operated by the China-Africa TEDA Investment company, it is a Special Economic Zone modelled on those in China and has attracted over USD 1 Bn of inward investment by manufacturers, assemblers and service companies.
20 years ago, at a ship naming ceremony, a senior executive at a very large Japanese corporation described his dream to me which sounded very much like what is happening in Morocco. He wanted to see the whole southern Mediterranean coast line "lit up like Dubai." Dubai itself has changed immeasurably since then. Could Chinese Special Economic Zones spread across North Africa? What would that do to the liner business? Some of those 24,000 TEU ships built to carry Chinese goods to the Mediterranean and North Europe could be replaced by zero-emission short sea vessels...Impossible? Maybe improbable but not impossible. China's investments in Africa to date could be just the beginning of a sea change in global logistics, enabled as much by EU environmental legislation as Chinese investment.